UPS 2006 Annual Report Download - page 95

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The fair value of each option grant is estimated using the Black-Scholes option pricing model. The weighted
average assumptions used, by year, and the calculated weighted average fair values of options are as follows:
2006 2005 2004
Expecteddividendyield.............................................. 1.80% 1.60% 1.50%
Risk-free interest rate ................................................ 5.13% 4.18% 4.31%
Expected life in years ................................................ 7 7 7
Expected volatility .................................................. 18.42% 18.21% 15.69%
Weighted average fair value of options granted ........................... $21.05 $17.33 $16.24
Expected volatilities are based on the historical returns on our stock and, due to our limited history of being
a publicly-traded company, an index of peer companies, as well as the implied volatility of our publicly-traded
options. The expected dividend yield is based on the recent historical dividend yields for our stock, taking into
account changes in dividend policy. The risk-free interest rate is based on the term structure of interest rates at
the time of the option grant. The expected life represents an estimate of the period of time options are expected to
remain outstanding, and we have relied upon a combination of the observed exercise behavior of our prior grants
with similar characteristics, the vesting schedule of the grants, and an index of peer companies with similar grant
characteristics.
We received cash of $30, $21, and $60 million during 2006, 2005, and 2004, respectively, from option
holders resulting from the exercise of stock options. We received a tax benefit of $12, $5, and $38 million during
2006, 2005, and 2004, respectively, from the exercise of stock options. The adoption of FAS 123(R) required us
to change the statement of cash flow classification of these tax benefits, and as a result, these tax benefits are
reported as cash from financing activities rather than cash from operating activities.
The total intrinsic value of options exercised during 2006, 2005, and 2004 was $45, $24, and $331 million,
respectively. As of December 31, 2006, there was $80 million of total unrecognized compensation cost related to
nonvested options. That cost is expected to be recognized over a weighted average period of 3 years and 4
months.
The following table summarizes information about stock options outstanding and exercisable at
December 31, 2006:
Options Outstanding Options Exercisable
Exercise Price Range
Shares
(in thousands)
Average Life
(in years)
Average
Exercise
Price
Shares
(in thousands)
Average
Exercise
Price
$ 19.93 - $50.00 ............................ 1,581 2.86 $49.94 1,581 $49.94
$ 50.37 - $56.90 ............................ 3,161 4.23 56.85 3,161 56.85
$ 57.45 - $60.22 ............................ 4,078 5.26 60.19 4,078 60.19
$ 60.38 - $70.70 ............................ 5,096 6.81 66.45 936 65.88
$ 71.88 - $116.48 ........................... 4,966 8.79 76.41 352 76.23
18,882 6.23 $64.75 10,108 $58.63
Restricted Performance Units
Beginning in 2003, we issued restricted performance units (“RPUs”) under the Plan. Upon vesting, RPUs
result in the issuance of the equivalent number of UPS class A common shares after required tax withholdings.
Persons earning the right to receive RPUs are determined each year by the Compensation Committee. Except in
the case of death, disability, or retirement, RPUs vest five years after the date of grant. All RPUs granted are
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